Mexico is set to pour $3.9 billion into Pemex, the country’s declining oil company. According to several officials, the move will strengthen the company’s finances and stop it from slipping further. The government is hoping the added capital will prevent a credit downgrade, but investors believe this is a stop-gap measure.
Pemex, a company that was once a beacon of Mexican pride, has been steadily declining due to corruption, reduced oil output, and steep labor costs. It’s reportedly in debt for about $106 billion and Fitch and Moody gave it a credit rating that’s slightly above junk.
Fitch stated last week that Mexico’s plan, which included steps like debt refinancing, extra tax cuts, and government aid, is probably not enough to stop the “continued deterioration” of Pemex’s credit standing. The company also pointed out that there’s currently a “significant level of underinvestment” in the oil company.
Pemex officials revealed in a presentation that the company would be receiving $1.8 billion for pension liability monetization. They also said that the company’s finances will be bolstered by a clampdown on corruption and promised that the government wouldn’t be taking on any new debt this year.
The oil company has a steep road ahead though. It has to make $27 billion or more in debt repayment for the next three years.
Investors were encouraged with the show of support coming from the Mexican government but also admitted that they were expecting more. As it is, they believe the proposed plan only provided a short-term solution.
Edward Glossop, an economist at Capital Economics, said that Pemex’s new measures are not enough to stabilize its oil output and are not considered a long-term solution. He estimated that yields on the company’s bonds could rise to about 1 percent this year if oil prices and Pemex’s output goes down further.
News of the government’s promised cash infusion saw the price for Pemex’s most traded bond, which matures in 2047, to fall. Data showed that its yield rose 14 basis points. The same thing happened to Pemex bonds maturing in 2024, with its return going up 32 basis points.
Government Ready to go the Distance
Mexico’s Finance Minister, Carlos Urzua, said in a press conference that the injection of capital would allow Pemex’s taxes to go down and open the doors to debt refinancing. He also emphasized that the government is ready to go the distance to ensure the oil company’s finances remain robust.
Pemex was downgraded two steps by Fitch last month due to its debt. Moody’s has already placed the company just within its investment level category. The two agency’s move underlined fears that another credit downgrade would raise the company’s financing costs substantially and result in more problems for the Mexican government.
Mexico’s new President, Andres Manuel Lopez Obrador, promised during his campaign that he would make Pemex stronger. He didn’t give a lot of details during a recent news conference how his administration would go about lowering Pemex’s taxes and secure the needed capital.
President Lopez Obrador did mention that steps to put a stop on fuel theft will result in around $1.6 billion in savings. He also said there was a plan to boost production and generate more revenue. The president also stated that cleaning out corruption in Pemex was crucial.
Investors were hoping for something more concrete but agreed with the president’s sentiment and praised Lopez Obrador for his stance on corruption and his “unconditional support” for the beleaguered state oil company.